Soaring house prices pose the greatest threat to Britain’s financial stability, the deputy governor of the Bank of England has warned.

It would be ‘dangerous’ to ignore the momentum building up in the UK housing market, Sir Jon Cunliffe cautioned, predicting that it is not out the question the market could be heading for a crash.

The Bank of England will have to decide in coming months whether to cool the recovery, he said, in the sternest warning from the Bank of England to date about surging British house prices.

Keeping an eye: Deputy governor of the Bank of England Sir Jon Cunliffe said it would be dangerous for the institution to ignore rising house prices

‘It would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year,’ Jon Cunliffe told a banking industry dinner. ‘This is a movie that has been seen more than once in the UK.’

He warned the growing momentum in the market is now ‘the brightest light’ on the Bank of England’s dashboard, and that it needs to stand ready to act.

His comments came on the same day that new figures revealed house prices jumped another 10.9 per cent year on year in April, marking the first time since April 2010 that annual growth has reached double figures.

Property prices leaped by 1.2 per cent in one month alone, reaching an average across the UK of £183,577, according to Nationwide.

The faster-than-expected price increases marked the biggest annual rise since June 2007, before the start of the financial crisis, the mortgage lender said.

The governor of the Bank of England Mark Carney and other top officials have previously played down talk of a property bubble, saying transactions remain below the level before the crisis.

Mr Cunliffe’s comments go much further, forecasting continued price rises for years to come.

Price rises had not been limited to London and ‘pent-up demand’ could ‘add significantly to pressure on the market for the next few years, he said. ‘All of this paints a picture of further pressure on transactions that could take us quickly to pre-crisis rates.’

Rising house prices put the Bank of England in a difficult position. It has been keeping interest rates at an all-time low of 0.5 per cent to help support the economic recovery. Bank officials maintain that the recovery is too fragile to start increasing rates and low inflation means relaxes pressure on the Bank to raise rates.

Warning: Deputy governor of the Bank of England Sir Jon Cunliffe

But rate rises could help to cool the property market, as mortgage rates would start to rise from all-time lows.

Instead, the Bank has pointed to other measures it could use to restrain credit.

Cunliffe sits on the Bank's Financial Policy Committee (FPC), which can force banks to hold more capital or ask regulators to take other types of action. It is due hold its next meeting in June.

The implementation of tougher rules for
borrowers through the mortgage market review last Saturday, is also
expected to cool the home loans market and temper demand in the
short-term.

Cunliffe also said Britain's banks, most
of whose lending is in the form of mortgages, are now better placed to
handle a major housing shock.

‘Whether and how to act further if, following the pause of the last couple of months, momentum continues to build, will be the most challenging judgement the FPC will have to take in the coming months,’ Cunliffe said.

The FPC was formally launched last year to plug a supervisory gap highlighted by the 2007-09 financial crisis.

Cunliffe said FPC was looking at whether higher property prices actually result in more transactions at higher prices, and whether that in turn leads to higher household debt.

Bubble? Last month house prices grew at their fastest pace since before the financial crisis

‘The FPC's response will depend on the nature of the risks to stability identified,’ he said.

Howard Archer, chief UK economist at IHS Global Insight, said it is ‘certainly justifiable’ to talk of a house price bubble in London and that the ‘risk of an overall housing market bubble developing remains very real as the strength in house prices is becoming more widespread’.

‘Consequently, policymakers need to keep a very close watch on how the housing market develops over the coming months and to be fully prepared to act,’ he said.

Below target: This chart shows the consumer
prices inflation rate for the last 10 years. It has finally fallen below
the 2% target for the first time since early 2010.